Apps & Software

Goldman Sachs Says 3 Hammered Cloud Software Stocks Could Explode Up to 75% Higher

This year certainly started off better than last year, but over the past 16 months the Dow Jones industrials are down almost 8%, the S&P 500 over 12% and the Nasdaq a stunning 13%. Despite a solid rally to start the year, we are still just treading water, and we could be poised for a big sell-off after what has been a classic bear market rally.

While conservative growth and income investors can buy stocks with big dividends or guaranteed money markets, which could be at 5% soon, what are aggressive growth investors to do at what seems like a difficult impasse? One good idea now is cloud software stocks that have been battered and could be poised to shoot higher in the second half of this year.

A new Goldman Sachs research report focuses on three cloud software companies that, despite nasty headwinds over the past year, look poised to take off over the balance of calendar 2023. All three have been pounded and are offering outstanding entry points. Goldman Sachs noted this in its extensive report on the three consumption software stocks:

Based on our conversations, investors have generally been more cautious on consumption names in the last 12 months due to the less-predictable nature of revenue relative to recurring models such as ServiceNow or Workday, particularly against a worsening macro-backdrop. While we have maintained the position that software is a growth-cyclical industry and consumption names are most likely to lead us on the way down due to real-time revenue recognition and higher susceptibility to customers’ end-market performance, the opposite also holds true if we see stabilization or incremental improvement to the macro-environment.

While still cautious, the analysts are looking ahead and also noted this:

From our perspective, we believe that the consumption peers may be among those furthest along in setting achievable fiscal year guidance targets relative to our broader coverage given pronounced revenue deceleration (30-40 pp.), still healthy backlogs and new logo wins, and management teams factoring for no incremental improvement to operating conditions through the remainder of the year. Better alignment between management guidance and buy-side expectations at the start of 2023 could set the stage for better stock performance for the consumption models.

Note that economic worries and tightening budgets are accelerating a move to consumption pricing, which charges software customers based on how much they use a product rather than a recurring annual or multiyear subscription fee.

While these three stocks are Buy rated at Goldman Sachs, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

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